Lithuania will step into 2021 with new taxes for polluters. Lawyers advise for how to be prepared

Ema Būtėnienė, attorney-at-law, expert of environmental law
Ingrida Kemežienė, tax expert

The new wording of the Law on Pollution Tax will come into force on 1 January 2021. It contains plenty of new provisions. Not to be caught by tax administrators’ surprise, the assessment of new requirements and preparation for fulfilling them would be worthwhile. To ensure smooth implementation of new requirements, the State will need to be ready since the compliance of certain tax developments with the Constitution and equal treatment of taxpayers is already questioned.

The first provision of the law that catches the eye is the definition of “concealed pollution”. What does it mean? According to the case-law, the contributing factor to whether or not pollution should be considered concealed and whether or not it should be subject to a higher tax rate was the model of taxpayer’s behaviour. To establish concealment of pollution, it was required to determine that the taxpayer sought that intentionally. An element of intention is not mentioned in the definition of concealed pollution in the new law; however, it might be expected that case-law, in that respect, would not change radically and, to state the fact of concealment of pollution, the taxpayer’s intention would need to be further established.
Concealed pollution would cover not only non-declared volume of pollution (which is common already) but also incorrectly indicated types of pollutants, fuel, products, packages and waste as well as factors reducing the tax rate if such errors led to non-declared or lower declared tax for pollution. For example, if a declaration contains an incorrect number of packages and the tax paid will exceed the required amount due to that error, it might be expected that the tax administrator will not apply a higher tax rate. Legal disputes, in this respect at least, arising till now (where the tax administrator would keep to the letter of the law and treat the errors as concealment of pollution, therefore disputes regarding errors were referred to the courts) can be avoided in the future.
The consequences of concealment of pollution for those who will not be accounting taxable products and filled packages and will be submitting declarations will be quite severe – the tax will be calculated by multiplying income received during the tax inspection by the payer by 0.02 coefficient, but in all cases at least EUR 10,000. Other entities that conceal pollution caused by the taxable product and package waste shall, as the case has been, pay the higher (double) tax rate. Interestingly, the law contains a requirement to pay a double tax rate if the payer grounds the tax relief for environmental pollution caused by package and product waste on fictitious (non-existent) documents. In other words, the double tax rate is introduced for allegedly criminal activities (e.g., the falsification of documents).
The ones concealing pollution from stationary sources will pay more. In this area, completely new development is that those who do not hold permits but are required to do so or in cases where the permit does not establish limits of pollution will pay a higher tax rate for emitted pollutants rather than for damage to the environment. Damage to the environment caused by pollution used to be considerably larger than the tax for pollution, but the polluters will hardly “save” any money from the latter amendment, as the tax will be calculated at an increased tax rate, and tax rates themselves will be raised as well. The annex to the law – list of tax rates for environmental pollution from stationary sources – introduces not only higher tax rate but also additional pollutants which were previously “hidden” in the groups of pollutants. For example, in the list of tax rates dioxin and furan emissions are estimated at the tax rate of EUR 5 million per tonne, solid particles containing asbestos – EUR 700 per tonne (in 2023 – EUR 1,300 per tonne), nitrogen emissions to water bodies will be subject to the tax rate three times higher than before (EUR 600 per tonne), and the same concerns phosphorus emissions (the tax rate will go up from EUR 1,007 to 3,500 per tonne).
One of the most important developments in the sector of packages raised a lot of discussions at the stage of drafting and harmonizing the law – different tax rates will apply to recyclable and not recyclable packages as of 2022. The law provides the definitions of those terms, and manufacturers, as well as importers, will need to have proof that the package placed on their market is recyclable. This will be necessary to apply lower tax rates and lower tariffs for handling package waste. Manufacturers and importers of packed products should also note that a separate tax rate will apply to wooden packages, i.e. it is “withdrawn” from the other package category.
Tire importers will see changes as well. The tax will increase significantly and it will depend on the size of the tire rather than on whether it is new, old, or restored. The tax rate of EUR 300 will apply to a tonne of motorcycle or passenger vehicle tires, and larger tires will be applied the tax rate of EUR 600.
Developments are foreseen in the field of tax for pollution from mobile sources. The law introduces a clarification that is especially important to the carriers, i.e. that the tax for pollution from mobile sources shall be paid only for fuel used in the Republic of Lithuania. Tax rates for certain types of fuel increase by EUR 1-2 per tonne of fuel; however, the law introduces corrective factors which both increase and reduce the tax rate for pollution from mobile sources, and they depend on technical specifications of the cars or other vehicles.  Perhaps the most relevant amendment in this sector is related to the application of tax reliefs. Where tax reliefs could be enjoyed by drivers whose vehicles had exhaust gas neutralization systems installed and operating, the tax relief will apply, as of next January, only to M1 and N1 non-diesel road vehicles whose first registration took place not earlier than 4 years ago and to M2 and M3, N2 and N3 category vehicles whose first registration took place not earlier than 3 years ago. The law does not clearly establish which first registration of a vehicle is implied, but most likely, it is the first registration, namely in Lithuania. Those who wish to enjoy tax relief for biofuel will need to use biofuel compliant with the biofuel standard referred to in the law.
Perhaps the greatest surprise introduced in the Law on Pollution Tax is that non-road mobile machinery used in agricultural activities becomes the subject of a new tax. The tax applies when such machinery is registered in Lithuania for the first time or when the vehicle holder changes. If the tax is not paid, the registration is not possible. The calculation and payment of this unusual tax will be controlled by State Enterprise Žemės ūkio informacijos ir kaimo verslo centras instead of the officers of the Environmental Protection Department.
NEWS FOR POLLUTERSWhere it comes to taxes, their calculation, declaration and payment, it is accustomed to settle the matters with the State Tax Inspectorate under procedures established by the Inspectorate.
Unfortunately, there are exceptions and one of them is the pollution tax (except a new tax for non-road mobile machinery used in agricultural activities) whose calculation, declaration, and payment are verified by the Ministry of Environment or its authorized authority, e.g., Environmental Protection Department. This is where the maze of legal regulation starts.
The law provides that the tax inspection is carried out by the authority authorized by the Ministry of Environment under the procedure laid down by that authority in accordance with the provisions of the Law and Law on Tax Administration (LTA). It does not specify, however, the scope of application of the LTA provisions. For example, neither the Law nor the rules for inspection approved by the Director of the Environmental Protection Department provide a reference to an option (or rather a restriction) of a follow-up tax inspection and time limit within which it must be initiated by the court’s order. It is not clear whether or not the LTA would apply as various interpretations and misunderstandings are common in practice.
Also, it is not clear whether the agreement on tax amount (Article 71 of LTA) may be concluded during the pollution tax inspection, which has been continuously debated over the last two years after the high-profile so-called “Metrail” case. Thus, the Law is new, but it contains a number of unknowns.
One more change of equal importance is that during the tax inspection the officers of the Environmental Protection Department will not assess the pollution tax returns for the tax period provided by taxpayers. Moreover, the taxpayer that provides the pollution tax return during the tax inspection or even adjusts the submitted one will be treated as having concealed pollution, which will enable the application of rates that increase the tax or calculation of higher taxes.
The only question is whether this change is compliant with the principle of equality enshrined in the Constitution and LTA – the principle of equality of taxpayers. In addition, it is not absolutely clear why taxpayers having to pay for environmental pollution should be discriminated against. The Supreme Administrative Court of Lithuania (the Court) has already held on the tax administrator’s (State Tax Inspectorate) reluctance in terms of assessing the tax returns submitted during the tax inspection.
The Court states that Article 80 of LTA (it applies to the pollution tax as well) which establishes a taxpayer’s right to adjust the tax return does not establish any restrictions for the taxpayer, except if the time limit for the calculation (re-calculation) of taxes has expired. Therefore, the taxpayer may exercise his right to adjust the tax return during the tax inspection as well, as the respective restriction to perform this independent act of the taxpayer is not established, and the tax administrator shall reasonably and by referring to the rules of law assess this taxpayer’s act, as the tax amount will depend on this assessment of the administrator that will be set by its own decision. Besides, when ordering the payment of an additional amount of pollution tax, the tax authority should assess the amount of tax paid by the taxpayer based on the original or revised pollution tax return submitted during the tax audit to avoid double taxation.
Thus, the provision of the Law enabling the environmental protection officers to refrain from assessing the pollution tax returns submitted during the tax inspection is in principle contradictory to the general rules for submission and adjustment of tax returns.
Last but not least – tax disputes regarding the additional calculation of pollution tax will be subject to pre-trial proceedings, i.e. taxpayers disagreeing with the decision of the Environmental Protection Department will need to appeal against it by applying to the Commission on Tax Disputes under the Government of the Republic of Lithuania first. This change is welcome, and we should hope that the practice of tax disputes insofar as it relates to pollution tax will be clearer and more consistent.